STOCK-BASED COMPENSATION

2014

Equity Incentive Plan (the

“2014

Plan”)

The Board of Directors adopted the

2014

Plan in

April 2013,

and the stockholders approved it in

June 2013.

October 2014,

the Board of Directors approved certain amendments to the

2014

Plan. The

2014

Plan, as amended, became effective on

November 13, 2014

and provides for the issuance of up to

5.5

million shares. The

2014

Plan will expire on

November 13, 2024.

As of

September 30, 2018,

2.7

million shares remained available for future issuance under the

2014

Plan.

Stock-Based Compensation Expense

The Company recognized stock-based compensation expenses as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Cost of revenue	$	471	$	453	$	1,384	$	1,264
Research and development		3,979		3,838		12,168		11,297
Selling, general and administrative		10,393		9,678		32,213		28,198
Total stock-based compensation expense	$	14,843	$	13,969	$	45,765	$	40,759
Tax benefit related to stock-based compensation	$	764	$	-	$	2,723	$	-

Restricted Stock Units

The Company’s restricted stock units (“RSUs”) include time-based RSUs, RSUs with only performance conditions (“PSUs”), RSUs with both market and performance conditions (“MPSUs”), and RSUs with only market conditions (“MSUs”). Vesting of all awards requires continued service for the Company. In addition, vesting of awards with performance conditions or market conditions is subject to the achievement of pre-determined performance goals. A summary of RSU activity is presented in the table below (in thousands, except per-share amounts):

	Time-Based RSUs					PSUs and MPSUs					MSUs				Total
	Number of Shares			Weighted- Average Grant Date Fair Value Per Share		Number of Shares			Weighted- Average Grant Date Fair Value Per Share		Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Number of Shares			Weighted- Average Grant Date Fair Value Per Share
Outstanding at January 1, 2018		258		$	66.30		2,266		$	48.59		1,620	$	23.57		4,144		$	39.91
Granted		93		$	116.01		595	(1)	$	82.64		-	$	-		688		$	87.16
Vested		(121	)	$	59.01		(636	)	$	40.78		-	$	-		(757	)	$	43.69
Forfeited		(14	)	$	82.08		(6	)	$	63.16		-	$	-		(20	)	$	76.57
Outstanding at September 30, 2018		216		$	90.79		2,219		$	59.92		1,620	$	23.57		4,055		$	47.04

_____________

(

)

Amount reflects the number of PSUs and MPSUs that

may

ultimately be earned based on management’s probability assessment of the achievement of performance conditions at each reporting period. In addition, MPSUs are subject to the achievement of market conditions.

The intrinsic value related to vested RSUs was

$13.9

million and

$12.5

million for the

three

months ended

September 30, 2018

and

2017,

respectively. The intrinsic value related to vested RSUs was

$79.0

million and

$61.3

million for the

nine

months ended

September 30, 2018

and

2017,

respectively. As of

September 30, 2018,

the total intrinsic value of all outstanding RSUs was

$465.9

million, based on the closing stock price of

$125.53.

As of

September 30, 2018,

unamortized compensation expense related to all outstanding RSUs was

$89.3

million with a weighted-average remaining recognition period of approximately

three

years.

Cash proceeds from vested PSUs with a purchase price feature totaled

$9.6

million for the

nine

months ended

September 30, 2018.

There were

proceeds for the

nine

months ended

September 30, 2017.

Time-Based RSUs:

For the

nine

months ended

September 30, 2018,

the Compensation Committee of the Board of Directors (the "Compensation Committee") granted

93,000

RSUs with time-based vesting conditions to non-executive employees and non-employee directors. The RSUs vest over

four

years for employees and

one

year for directors, subject to continued service with the Company.

2018

PSUs:

February 2018,

the Compensation Committee granted

188,000

PSUs to the executive officers, which represent a target number of shares to be awarded based on the Company’s average

two

-year (

2018

and

2019

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2018

Executive PSUs”). The maximum number of shares that an executive officer can earn is

300%

of the target number of the

2018

Executive PSUs.

50%

of the

2018

Executive PSUs will vest in the

first

quarter of

2020

if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining

2018

Executive PSUs will vest over the following

two

years on a quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the

2018

Executive PSUs is

$46.1

million.

February 2018,

the Compensation Committee granted

44,000

PSUs to certain non-executive employees, which represent a target number of shares to be awarded based on the Company’s

2019

revenue goals for certain regions or product line divisions, or based on the Company’s average

two

-year (

2018

and

2019

) revenue growth rate compared against the analog industry’s average

two

-year revenue growth rate as published by the Semiconductor Industry Association (

“2018

Non-Executive PSUs”). The maximum number of shares that an employee can earn is either

200%

300%

of the target number of the

2018

Non-Executive PSUs, depending on the job classification of the employee.

50%

of the

2018

Non-Executive PSUs will vest in the

first

quarter of

2020

if the pre-determined performance goals are met during the performance period and approved by the Compensation Committee. The remaining

2018

Non-Executive PSUs will vest over the following

two

years on an annual or quarterly basis. Vesting is subject to the employees’ continued employment with the Company. Assuming the achievement of the highest level of performance goals, the total stock-based compensation cost for the

2018

Non-Executive PSUs, excluding cancelled shares, is

$8.8

million.

The

2018

Executive PSUs and the

2018

Non-Executive PSUs contain a purchase price feature, which requires the employees to pay the Company

$30

per share upon vesting of the shares. Shares that do

not

vest will

not

be subject to the purchase price payment. The Company determined the grant date fair value of the

2018

Executive PSUs and the

2018

Non-Executive PSUs using the Black-Scholes model with the following assumptions: stock price of

$110.00,

expected term of

2.6

years, expected volatility of

27.5%

and risk-free interest rate of

2.3%.

2015

MPSUs:

December 31, 2015,

the Compensation Committee granted

86,000

MPSUs to the executive officers and

41,000

MPSUs to certain non-executive employees, which represent a target number of shares to be awarded upon achievement of both market conditions and performance conditions (

“2015

MPSUs”). The maximum number of shares that an employee can earn is

500%

of the target number of the

2015

MPSUs. The

2015

MPSUs consist of

four

separate tranches with various performance periods ending on

December 31, 2019.

The

first

tranche contains market conditions only, which require the achievement of

five

stock price targets ranging from

$71.36

$95.57

with a performance period from

January 1, 2016

December 31, 2019.

As of

September 30, 2017,

all

five

stock price targets for the

first

tranche have been achieved and approved by the Compensation Committee.

The second,

third

and

fourth

tranches contain both market conditions and performance conditions. Each tranche requires the achievement of

five

stock price targets measured against a base price equal to the greater of: (

) the average closing stock price during the

consecutive trading days immediately before the start of the performance period for that tranche, or (

) the closing stock price immediately before the start of the performance period for that tranche. The stock price targets for the

second

tranche range from

$89.56

$106.81

with a performance period from

January 1, 2017

December 31, 2019.

As of

December 31, 2017,

all

five

stock price targets for the

second

tranche have been achieved and approved by the Compensation Committee. The stock price targets for the

third

tranche range from

$120.80

$135.48

with a performance period from

January 1, 2018

December 31, 2019.

As of

September 30, 2018,

all

five

stock price targets for the

third

tranche have been achieved and approved by the Compensation Committee. The stock price targets for the

fourth

tranche will be determined on

December 31, 2018

with a performance period from

January 1, 2019

December 31, 2019.

In addition, each of the second,

third

and

fourth

tranches requires the achievement of

one

of following

six

operating metrics:

	1.	Successful implementation of full digital solutions for certain power products.
	2.	Successful implementation, and adoption by a key customer, of an integrated, software-based field-oriented control with sensors to motor drivers.
	3.	Successful implementation of certain advanced power analog processes.
	4.	Successful design wins and achievement of a specific level of revenue with a global networking customer.
	5.	Achievement of a specific level of revenue with a global electronics manufacturer.
	6.	Achievement of a specific level of market share with certain core power products.

As of

October 30, 2018,

the

first

and the

second

operating metrics have been achieved and the determination of achievement was approved by the Compensation Committee.

Subject to the employees’ continued employment with the Company, the

2015

MPSUs will fully vest on

January 1, 2020

if the pre-determined individual market and performance goals in each tranche are met during the performance periods and approved by the Compensation Committee. In addition, the

2015

MPSUs contain sales restrictions on the vested shares by employees for up to

two

years.

The Company determined the grant date fair value of the

2015

MPSUs using a Monte Carlo simulation model with the following weighted-average assumptions: stock price of

$61.35,

expected volatility of

33.2%,

risk-free interest rate of

1.3%,

and an illiquidity discount of

7.8%

to account for the post-vesting sales restrictions. Assuming the achievement of all of the required market and performance goals, the total stock-based compensation cost for the

2015

MPSUs, excluding cancelled shares, is

$24.6

million (

$8.3

million for the

first

tranche,

$4.5

million for the

second

tranche,

$5.2

million for the

third

tranche, and

$6.6

million for the

fourth

tranche).

For the

first

tranche, stock-based compensation expense is being recognized over the requisite service period. For the second,

third

and

fourth

tranches, stock-based compensation expense for each tranche is recognized if an operating metric has been achieved, or if management believes it is probable that an operating metric will be achieved during the performance periods in each reporting period. As of

October

30,

2018,

two

operating metrics have been achieved, and based on management’s quarterly assessment,

one

additional operating metric was considered probable of being achieved during the performance periods. Accordingly, stock-based compensation expense is being recognized for the second,

third

and

fourth

tranches over the requisite service period.

Employee Stock Purchase Plan (“ESPP”)

For the

three

months ended

September 30, 2018

and

2017,

15,000

and

18,000

shares, respectively, were issued under the ESPP. For the

nine

months ended

September 30, 2018

and

2017,

33,000

and

40,000

shares, respectively, were issued under the ESPP. As of

September 30, 2018,

4.6

million shares were available for future issuance.

The intrinsic value of the shares issued was

$0.6

million and

$0.5

million for the

three

months ended

September 30, 2018

and

2017,

respectively. The intrinsic value of the shares issued was

$1.1

million and

$1.0

million for the

nine

months ended

September 30, 2018

and

2017,

respectively. As of

September 30, 2018,

the unamortized expense was

$0.4

million, which will be recognized through the

first

quarter of

2019.

The Black-Scholes model was used to value the employee stock purchase rights with the following weighted-average assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Expected term (years)		0.5			0.5			0.5			0.5
Expected volatility		30.8	%		23.5	%		29.5	%		23.5	%
Risk-free interest rate		2.2	%		1.2	%		2.0	%		0.9	%
Dividend yield		0.9	%		0.8	%		1.0	%		0.9	%

Cash proceeds from the shares issued under the ESPP were

$3.0

million and

$2.7

million for the

nine

months ended

September 30, 2018

and

2017,

respectively.